Loading...
Symbols:
Authors:

StatoilHydro: Well-Prepared for the Future

by: Fat Prophets October 12, 2008 | about stocks: STO    

Fat Prophets

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

The two lubricants of global economic growth have had a rough time of it as of late. Credit, the first of these, is remaining stubbornly frozen despite the best efforts of governments and central bankers around the world. This situation is in turn exasperating the recessionary outlook the world was already facing, and in the process magnifying the correction in price of the second, oil.

This has had an adverse impact on all oil & gas producers regardless of their quality. However, we view the correction as overdone and disconnected from the fundamental story supporting higher prices. We believe in time these factors will begin to re-assert themselves and high quality participants, such as Norway’s StatoilHydro (NYSE: STO), will benefit.

Now we are not about to make a case that recessions are a positive influence on near term oil prices. Clearly slower economic growth will have an impact on energy requirements and oil & gas are important components of satisfying this demand. And with oil prices running ahead of themselves earlier this summer, a correction was due.

However, what about the medium and long term? The fear of recession is now taking the price of oil down closer to the range where new projects’ economics come into question. Remember that today’s hydrocarbon resources are more complex and difficult to develop. Easy and cheap to produce oil is not a feature of the current environment.

If decisions are taken not to pursue projects due to the non-commercial aspects of the deposit, then the low prices we see today will be successful in destroying future supply. The more familiar demand destruction concept is commonly trotted out, however this lack of investment today will set up an even worse supply crunch in the future. This in turn will result in much higher prices later when economic growth perks up again.

And speaking of economic growth, there are still areas of robust growth in the world. China and India have been responsible for much of this and we expect them to continue leading the way.

Monetary stimulus is on the agenda of both countries. In addition, Chinese authorities have plenty of cash to throw at internal development projects, thus providing a source of strong fiscal stimulus. And it is also important to bear in mind, for a time, growth in China had actually become too fast. Knocking the rate of GDP growth back towards 10 percent was prudent and still represents a substantial uplift over what we have, even during the good times, in the West.

Reforms in India are, in our view, also likely to help underpin higher economic growth in the future as obstacles to development are slowly dismantled.

Ultimately, we believe today’s credit crisis and the policy response to it will yield higher inflation and a weaker dollar. This weaker greenback is an other factor supporting higher oil prices.

Then there are the world’s geo-political hotspots that refuse to go away. Whilst most people have been concentrating on the turmoil in the stock market, progress with Iran and that country’s nuclear ambitions have if anything deteriorated further. And while North Korea is not an important oil producer, that country is also adding to the world’s nuclear headaches.

Russia meanwhile invades its neighbor which also happens to host several very important oil pipelines. Raising concerns all over again about the very real threat of supply disruption.

All of this is happening right as we begin to enter the high demand winter heating season. This period typically provides a nice boost to demand which is less much less discretionary than cutting back on fuel for the car or truck over the summer.

And finally, the fall in price and the fear of a temporary glut in the market has got the attention of OPEC. We believe members of the exporting cartel will be active in defending further falls. As such, a reduction in output quotas is certainly a topic that will receive much attention at the emergency meeting arranged for November 18th.

In September, the group agreed to adhere more closely to existing quotas which would result in 500,000 barrels of oil per day coming out of the market. A cut in those quotas now seems likely in our view given the strong move below $100 per barrel.

The falls that we have witnessed this week will have understandably shaken Members confidence in the viability of the oil bull market, we hope this discussion helps reassure that the oil market remains well supported from a fundamental point of view.

In this environment, StatoilHydro is pressing ahead with plans to grow production from 1.9 million barrels of oil equivalent per day (boepd) this year to 2.2 million boepd in 2012. In order to do this, the group is exploiting opportunities close to home on the Norwegian continental shelf (NCS) as well as internationally.

This involves the development of smaller fields on the NCS which are economical due to StatoilHydro’s accumulated technical know how and at times the proximity of existing infrastructure. Plans currently call for the company to increase production on the NCS by 600,000 boepd by 2015.

Elsewhere, the group continues to garner exploration success in the field. In Algeria, the company recently completed the TNK-2 well, its sixth positive well in the Hassi Mouina license area in Algeria.

On the NCS, StatoilHydro recently made two new discoveries. One, a 100-125 million barrel oil discovery, was located underneath a gas field that was discovered over 30 years ago! The other is a gas field, located near another earlier undeveloped discovery, that is thought to contain up to 4 billion cubic feet of gas.

These exploration successes are the producers of tomorrow and will eventually join the ranks of development projects such as the Gudrun, Trestakk, Valemon, Astero, Peon, and Lavrans fields.

In all we believe robust oil & gas price will continue to support the industry. Fundamentally, the dynamics are such that further falls in oil prices will sow the seeds of higher prices in the future. Within this environment, StatoilHydro is doing the necessary exploration and development work now that will continue to support buoyant production and earnings growth.

That said, there is no denying what investor are keeping their eye on today’s threats of global recession. In fact, since our last review in August, there has been a significant deterioration in the outlook for StatoilHydro. As evident on the daily chart, continued weakness has seen prices breach major support at $22, declining to a low of $18 this week. This is the lowest level for the stock since mid 2005.

The correction of the past 5 months has been a significant interruption to the longer-term upward trend. And despite many technical indicators deeply in oversold territory, in the absence of a reversal pattern we cannot rule out deeper falls in the weeks ahead.

From a broader perspective, a sustained period of consolidation is now required, in our opinion, before sustained upward momentum is likely to return. Without this, rally attempts are likely to struggle to break above resistance in the $22 to $25 region.

Meanwhile, from a valuation perspective, the stock trades on an undemanding prospective price earnings ratio of only around 5.5 times! We believe the market has got this wrong, however we are unwilling to step in front of a moving train and will wait for the stock’s consolidation phase to run its course before re-iterating as a Buy to new Members.

As such, StatoilHydro will remain firmly held in the Fat Prophets Portfolio.

Disclosure: Author holds a position in STO

Related Articles

This article has 2 comments:

  •  
    Oct 12 10:14 AM
    Agree completely. In the commodities businesses, rising prices are their own enemy, as they lead to more production and lower prices. Falling prices are their own friend, as they lead to postponement of projects, falling inventory, and so higher prices. The U.S. political scene has helped with higher prices by keeping offshore off limits and proposals of a windfall profits tax, which will further hurt E&P in the United States (including lost jobs that the politicians claim to care about so much). This will shorten the time to the next rise in prices.
    Reply
  •  
    Oct 12 03:30 PM
    What we "maybe" facing is a depression of different and similar effects of the 1930's. In that depression many commodities fell below the cost of production for years without the beneficial effect of enough shortages to encourage price hikes.

    I too thought the markets would stabilize oil pricing and therefore less investment would produce oil shortages much faster than later. Now I wonder if my own scenario is valid or even reflects a scentilla of the comming reality.

    The whole world was and still is based on unsustainable debt growth, this includes China and Asia more than is being generally commented on.
    China now has announced that they will keep growth going with internal projects. Japan tried the same thing in the 90's and it went nowhere.

    I now view oil (not gas so much) as in a secular bear market until 2012. Oil will not see the likes of 147 dollars until then.
    Reply
More Comments on STO ยป
More by Fat Prophets
Investment Resources
Money Managment
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Long Ideas
Exploration & Production
Alternative Energy
Coal